Please note: Due to scheduling conflicts, there will be no market commentary next week.
The market trended higher for most of the week but fell sharply on Friday. For the week, the Dow rose by 0.2% and the S&P fell by the same amount, while the Nasdaq topped them both with a gain of 1.1%.
Source: MSN Moneycentral
The market finally had a strong pullback last Friday on news that the SEC will charge Goldman Sachs with security fraud. For over two months, the market has practically risen in a straight line upwards and we are actually reassured by the drop. After rising for so long without a correction, we believe the market has gotten ahead of itself, and it looks like other investors feel the same way. The news out of Goldman was not necessarily bad enough to send the market down over 1% in one day, but it gave investors an excuse to take some gains off the table. We are not sure if this is the beginning of a new leg down or if it was a one day event, but we are not committing any new capital to the market until we see how it plays out in the coming days.
Goldman Sachs lost over 16% at one point on Friday on the news. The story is certainly bad for Goldman, but we don’t see it being that bad. Without getting too technical, according to the SEC, Goldman Sachs created a product for trading that was based on subprime mortgages. An outside hedge fund apparently had input in the creation of the product and then went on to short it (profit when the value goes down), but Goldman sold it to investors who went long (profit when the value goes up, like a regular stock transaction). This is not illegal, but Goldman did not disclose the actions of the hedge fund to investors, which is illegal. Of course, the subprime sector collapsed and the hedge fund made a billion dollars, while the investors lost a billion dollars. What spooked investors was the fact that it is not known if other banks engaged in a similar practice and are also being investigated by the SEC.
The timing of the SEC announcement is also suspect, as financial regulatory reform is the hot topic in
Several companies released earnings this week, and the results show that businesses are returning to profitability. Economic reports were mostly positive as well, reflecting the fact that the economy continues to improve.
Earnings season rolls on next week as more companies are scheduled to report. A busy economic calendar accompanies the earnings reports as leading economic indicators will be released Monday, the producer price index and existing home sales come in on Thursday, and durable goods and new home sales come in on Friday. It will be interesting to see how the market reacts in light of the drop last Friday.
Where are we investing now?
As mentioned earlier, we will not be committing any new money to the market after the drop Friday. We aren’t sure if that was a one day event or a new leg down and will be watching the market closely this week. If earnings continue to come in positive and the market improves, we will reevaluate our position at that time. Still, we are optimistic on the next several months, but remain cautious. The easy money and stimulative measures currently in place will help push the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term.
In equities, we are focusing on higher-quality and multi-national stocks. We continue to avoid banking and insurance sector stocks. Commodities remain a longer term favorite and we believe that government policies will weaken the dollar over time, despite its recent rise. TIPs continue to be important as we expect inflation to increase in the future, though the CPI report this week indicates little or no inflation at this time.
